Gold PriceComments Off on Solutions for Everything, Answers to Nothing

Could one day’s Financial Times be the best £2.50 humanity ever spends…?

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.

We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.

We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.

The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.

Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.

Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.

Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.

He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.

Yo, Larry, Earth calling…Have you ever been to New Jersey?

It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.

Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.

What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.

But the fantasy of borrowing for “public investment” soaks the FT.

It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.

How do you stimulate demand?

You try to get people to take on more debt – even though the slowdown was caused by too much debt.

On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:

It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.

On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.

Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.

This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”

The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!

Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy.

We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.

Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.

Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?

Nobody knows. But a serious paper would at least ask.

It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.

But the FT does none of that.

Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.

But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”

But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.

“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”

Aha! Consumers are not doing their part either.

Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.

Swiss gold referendum held as Kremlin looks to buoy platinum and palladium prices with state purchases…

The CENTRAL BANKS of Russia and Switzerland are weighing the merits of buying gold and other precious metals, but for very different reasons.

Now holding the world’s 5th largest state gold reserves, Russian central bank chiefs plan to meet with officials from South Africa – the world’s No.1 platinum mining nation – to discuss buying platinum and palladium in the open market to support prices, according to a Kremlin official.

Moscow’s precious metals and gems repository, Gokhran, already holds unreported quantities of palladium, of which Russia is the No.1 mine producer. Gokhran’s director, Andrey Yurin, last month repeated comments he made in May about returning to buy palladium in 2015, after focusing on buying gold this year.

The Swiss National Bank meantime faces a popular vote on buying gold – aimed at re-instating the Franc’s bullion backing – but is campaigning against the move.

Voters in Switzerland in 1999 approved an end to the legal requirement for gold reserves to back the Franc’s value, and approved large sales starting at what proved two-decade lows, now some 70% below current prices.

To win a place on Switzerland’s next referendum, scheduled for 30 November, the “Save Our Swis Gold” initiative secured over 100,000 signatures on a petition. Its proposals risk the central bank’s ability to ensure price stability and stable economic growth, finance minister Eveline Widmer-Schlumpf said Tuesday. Peter Hegglin – head of the Swiss cantons’ conference of finance directors – also joined SNB president Thomas Jordan’s repeated calls for voters to reject the move.

The Swiss National Bank would on one estimate need to buy perhaps 1,500 tonnes of gold to meet the referendum’s terms, which set a minimum 20% gold target for the SNB’s balancesheet, swollen through quantitative easing to buy Euros and maintain the Franc’s peg against its weak, neighboring currency on the forex market.

“Palladium is not a gold and currency reserve,” said Russian palladium miner Norilsk’s CEO Vladimir Potanin this spring, when Gokhran hinted it was considering buying the precious metal. “It should be sold rather than bought by the state…We could help, and not only by buying those volumes, but by marketing the deal.”

Named by Moscow’s minister for natural resources Sergei Donskoi as being involved with the proposed Russian-South African cartel, Norilsk said in late September it is raising funds to buy palladium from the Russian government, according to Bloomberg.

“My initial reaction is they could probably do it,” says US law professor Harry First, commenting to specialist site Mineweb on the proposed Russia-South Africa cartel. Apparently aimed at buoying metal prices after platinum and palladium hit multi-year lows in the open market, such a move would however face strong opposition from PGM consumers led by auto-makers, not least in China.

Between them, Russia and South Africa account for four-fifths of the world’s known platinum-group reserves as yet unmined.

KAL KOTECHA is editor and founder of the Junior Gold Report, a publication about small-cap mining stocks.

Kotecha has previously held leadership positions with many junior mining companies, and after completing a Master of Business Administration in finance in 2007, he is now working on his PhD in business marketing, and also teaches economics at the University of Waterloo.

Here Kal Kotecha tells The Gold Report‘s sister title, The Mining Report, that to obtain superior results, you cannot do what everyone else is doing. He maintains that much of the risk associated with junior resource equities has been beaten out by the herd mentality and that selectively buying what’s left presents opportunity…

The Mining Report: You’re the editor of Junior Gold Report, but you also follow similar-sized companies in the energy sector. Please give our readers an overview of the energy space.

Kal Kotecha: I’ve been involved in the space since 2002 and I’ve never witnessed anything like what is currently happening. In the energy sector, I see the price of uranium increasing, but to see price appreciation across energy stocks, the price of oil must remain near $100 per barrel. That benchmark could prove challenging, given the growing supply of shale oil in the US Texas produces as much oil as Iraq or about 3 million barrels of oil per day. Most of it comes from two sources: the Eagle Ford Shale in southwest Texas and the Permian Basin in west Texas. Chris Guith, senior vice-president of policy for the US Chamber of Commerce’s Institute for 21st Century Energy, estimates that recoverable resources amount to 120 years of natural gas, 205 years of oil and 464 years of coal at current demand levels.

Fracking has lowered the price of natural gas by about 70% over the previous seven years or so. The price of oil, especially in the US, should decrease to $60-70 per barrel on average because of shale oil. US dependency on imported oil should lessen, too.

TMR: Is that a near- or medium-term forecast?

Kal Kotecha: That’s a medium- to longer-term forecast. I don’t believe in peak oil theory. The US’ savior in the oil industry is going to be shale oil, and there is a lot of it. Ultimately, that’s going enhance the US economy. Basically everything runs on oil. The US won’t have to import as much oil from Saudi Arabia or even Canada.

TMR: What’s your price forecast for natural gas?

Kal Kotecha: Natural should stay between $4-6 per thousand cubic feet (Mcf). It’s more expensive in Europe, but in North America the floor should remain around $4/Mcf. I don’t think it’s going to go back up to $12 or down to $3.

TMR: You mentioned earlier that you expect uranium prices to rise.

Kal Kotecha: Uranium is an interesting space. As oil prices slowly decrease, the demand for uranium seems to increase. Geopolitical tensions, especially in Russia and Ukraine, could lead to much higher prices. Russia is a large uranium producer and Western nations might stop importing uranium from Russia if political fires burn much hotter.

As of last month, China had 21 nuclear power reactors operating on 8 sites and another 20 under construction. China’s National Development and Reform Commission intends to raise the percentage of electricity produced by nuclear power to 6% by 2020 from the current 2% as part of an effort to reduce air pollution from coal-fired plants. Ultimately, uranium demand will triple inside six years.

In India, the government is expected to spend nearly $150 billion to develop nuclear power over the next 10-15 years. India now has nuclear energy agreements with about a dozen countries and imports primarily from France, Russia and Kazakhstan.

TMR: In a recent note on Junior Gold Report you wrote, “I smell smoke, but where’s the fire?” in relation to the current sentiment in the junior precious metals market. What’s your conclusion?

Kal Kotecha: The current pessimism surrounding the junior precious metal space has largely contributed to the fall in price of the commodities, but the beautiful thing about pessimism and hate towards a market sector is that there is plenty of room for error. Fantastic opportunities arise when great companies have been undervalued due to negative news that does not have a long-term impact on the company. So how do you determine which stocks, in a beaten up resource market, are great buys?

TMR: Do you have an answer?

Kal Kotecha: One must understand the essential principles of intrinsic value and the margin of safety. The principle of intrinsic value determines the worth of a stock through a combination of the price and the condition of the company. So no matter how great a company is, it may not always be a good investment. As Howard Marks wrote in The Most Important Thing: Uncommon Sense for the Thoughtful Investor, investment success doesn’t come from buying good things, but rather from buying things well.

The principle of the margin of safety involves minimizing risk and then, therefore, minimizing the potential loss of one’s money. Dealing with risk is a necessary part of investing, as stock price fluctuations occur and are often unpredictable. If the risk perceived by the herd – general investors who follow the majority – is less than the actual risk, then the returns will outweigh the risks. So when consensus thinks something is risky, the general unwillingness to buy it pushes the price down to where it is no longer risky at all, given it still has intrinsic value, because all optimism has been driven out of the price.

TMR: What are some metrics to help investors?

Kal Kotecha: A junior mining company’s ability to produce resources at a cost below its market price is essential for its sustainability. Junior mining companies should be judged by their ownership of mines, the quality of these mines and how management has executed similar projects in the past. Determining whether this data has been incorporated into the stock price is essential when seeking undervalued companies. I think this is where a lot of resource investors get duped.

Do you smell the smoke? I suggest investigating the source. I’d say that the herd is done shouting fire, and smart investors are filling up their baskets with goodies. But don’t forget to do your research, check the facts and invest in a contrarian fashion. To obtain superior results, you cannot do what everyone else is doing.

TMR: Many investors have heard the adage “buy when there’s blood in the streets.” When should investors reasonably expect to start making money again, given the current market conditions?

Kal Kotecha: That’s a billion-Dollar question. A lot of colleagues have predicted prices that have not come true yet. The big upswing in gold in the late 1970s was followed by a collapse and we had to wait 20 years for another upswing. It’s already been three years. I don’t think we have to wait another 5 or 10 years, but there is going to be a time very soon where investors will be rewarded. I think when the upswing happens it’s going to be very parabolic. I think it’s going to take wings on its own. Patience will be rewarded.

TMR: What gold price are you using in your analysis?

Kal Kotecha: $1200 an ounce. Many factors go into determining the price of commodities, especially gold and silver. Some of these factors include price manipulation, which cannot be foreseen; geopolitical strife; and import quotas, which are happening in India. However, I remain very bullish on precious metals in the long-term.

The best buy right now is silver. Silver is a screaming steal at $18 per ounce. I first started buying silver at around $7 per ounce in 2003 and I sold quite a bit in the $48 range a few years ago. I’m starting to accumulate silver quite heavily again. The ratio of gold to silver prices is currently around 68:1. I see that going to 50:1. If there’s another precious metals mania, perhaps 25:1. Silver demand is also very high. A record 6,000 tonnes silver was imported into India last year – roughly 20% of global production.

TMR: What’s your advice for investors in the current junior resource market?

Kal Kotecha: I think a combination of five or six stocks in a portfolio with a mix of junior energy and mining equities is probably a good start. That’s what I do. It’s difficult for the average investor to follow more than five companies.

Gold PriceComments Off on All Eyes on US Fed as Gold Price Bears Risk "Short-Covering Rally" from Lowest Weekly Close in 36

GOLD PRICES rallied $10 per ounce from a new 8-month low of $1225 hit at the start of Asian trade Monday, trading 0.5% above last week’s finish in London.

European stock markets held flat ahead of this week’s US Federal Reserve statement on rates and QE on Wednesday, plus the start of the Eurozone central bank’s new round of long-term bank financing on Thursday.

Losing 2.7% against the Dollar, gold prices ended last week with their lowest Friday PM Gold Fix in London since 27 December 2013, down at $1231 per ounce.

Silver on Monday held steadier than gold prices, unchanged around $18.65 per ounce to trade some 1.0% above last Thursday’s new 14-month low.

“With last year’s double bottom of $1180 not too far off,” says Jonathan Butler at Japanese conglomerate Mitsubishi, “attention will be on the Fed’s comments on Wednesday.”

“A hawkish stance” – such as the loss of the words “considerable time” from the Fed’s forecast for its likely delay to raising interest rates from zero – “could see further strengthening of the Dollar and potentially a further gold capitulation,” says Butler.

“If the market view the Fed’s comments as too dovish, gold could stage a reversal.”

“We could see a short-lived technical bounce,” reckons Ed Meir at US brokerage INTL FCStone, but “traders will likely use any rallies as a selling opportunity.”

In US derivatives, “Some short covering and bargain hunting [was] seen down at the lows overnight,” says a note from brokerage Marex Spectron’s David Govett in London.

Latest data on US futures and options show speculative traders as a group grew their “short” betting against gold for the 4th week running in the week-ending last Tuesday, taking their “net long” gold position (of bullish minus bearish bets) to its lowest level since mid-June.

Speculative betting against silver prices meantime rose for the 6th week in a row, up to a level only surpassed 3 times in the last 20 years, all in early summer 2014 when the metal began a rapid 16% rally.

“Money managers have contributed to the fall in both gold and silver prices,” says the commodities team at Germany’s Commerzbank.

“Given that prices have dropped further since the reporting date, net long positions have no doubt also been reduced further.”

“Physical buyers are still absent, unwilling to support prices on fresh lows.”

With Tokyo closed for Japan’s national Respect for the Aged holiday, “Liquidity was already on the thin side,” says the Asian desk of Swiss refining and finance group MKS, “but once the Shanghai Gold Exchange opened up more physical interest began to trickle in – finally!”

Despite slipping from Friday’s close in Yuan terms, Shanghai’s main gold contract more than doubled its premium Monday to more than $5 per ounce over comparable London quotes.

With Scottish opinion polls meantime putting the “Yes” and “No” camps neck-and-neck for Thursday’s independence vote, the British Pound held onto last week’s bounce from new 2014 lows.

The PRIMARY UNIT of time measurement for high-frequency traders might be the microsecond, but for normal retail traders, it’s vital to know the best months, days and even half-hours of the day to make market transactions, writes Frank Holmes at US Global Investors.

Consider Black Friday, the most active shopping day of the year. Let’s say a 60″ 1080p plasma HDTV normally goes for around $900 but, on Black Friday, is discounted to $500. That’s a 44% savings. If you had a desire to own this TV and were somehow guaranteed a way to bypass the rabid mobs, you’d be a fool to spend $900 on it the day before.

Likewise, you’d be at a disadvantage to buy or sell a security without first conducting some level of research to determine the optimal time, statistically speaking, to make a transaction. At the very least, you should know when not to make a transaction.

Fortunately, much of this research has already been conducted. My friend Jeffrey Hirsch, following in the footsteps of his late father Yale Hirsch, has for years edited the invaluable Stock Trader’s Almanac, which is updated annually. The book is notable for finding reliable patterns in market trends and behavior, on both the micro and macro scale. It also gave birth to such well-known investing adages as “Sell in May and Go Away” and the “January Barometer”.

Thirty-five years ago when I was just getting started in the investment business, I asked Yale how he managed to arrive at his findings. He told me that his background in music composition enabled him to “hear” melodies, if you will, in four-year presidential cycles, seasonal cycles, weekly cycles and more. This interdisciplinary approach of combining music and finance should inspire all investors to leverage their own unique skills, talents and backgrounds to seek patterns in the market that others might overlook.

If you don’t already own a copy of the Stock Trader’s Almanac, I urge you to make a special trip to the bookstore. You can also visit the book’s website and sign up for a free seven-day trial. The site provides a wealth of helpful and fascinating information for investors to peruse.

Previously I discussed market patterns in four-year presidential cycles and seasonal cycles. But now let’s look at months and work our way down to half-hours of the trading day.

Months

“Sell in May and Go Away” is more than a clever expression. The Stock Trader’s Almanac has over six decades’ worth of data to support the reliability of this strategy. Based on the S&P 500 Index’s monthly closing prices, November, December and January are the best months for trading volume. Conversely, the worst-performing months of the year fall between May and October.

Even though the Dow Jones Industrial Average has been up four of the past five Septembers, the ninth month has still been the worst-performing since 1950 for all of the major indexes and exchanges, including the Dow, S&P 500 Index, NASDAQ and Russell 1000 Index.

What this shows is that, in August, September and October, it’s time to “nibble” on stocks, as prices are dropping. In March, April and May, it’s time to trim.

As I said, the Dow has been improving slightly in September over the last few years. Its 20-year return has risen to -0.51% from its 50-year return of -0.77% return.

Theoretically, investing from November 1 through April 30 and then switching to fixed-income products for the rest of the year seems to be a safe and effective strategy. If you backtest this to 1950 with an initial $10,000 investment, you would have gained an estimated 6,740%. Investing the same $10,000 from May through October would have cost you $1024. What a difference six months makes.

I must stress, however, that this chart, and those that follow, shows only probability. Like a basketball bouncing down a rocky mountainside, nothing is certain, and actual behavior varies. Macro events such as presidential elections, midterm elections and changes in fiscal and monetary policy have a dramatic effect on the outcome of the market.

For further data, check out the Almanac’s best and worst S&P 500 entry and exit dates, separated into the five best months (November through April, excluding February) and seven worst months (May through October, including February).

Weeks

Below you can see the best and worst weeks of the Dow, ranging from 2008 to 2012.

What’s interesting here is that, even though September is historically the worst month in which to trade, it had three of the best weeks and only one of the worst weeks. Conversely, December, one of the best months in which to trade, had only two of the best weeks. No week in December fell in the “worst” category, however.

Days

Which day is the best to buy? Which day is the best to sell? That depends on whether we’re talking about days of the week, days of the month, days preceding or following holidays – there are innumerable contexts and implications to consider, all of which have already been carefully studied and scrutinized by Yale and Jeffrey Hirsch.

According to Hirsch, the best day to trade was once the last trading day of the month, followed by the first four trading days of the next month. Front-runners who noticed this trend, however, took advantage of it, leading to a shift in 1982. Since then, the strongest days tend to fall on the ninth, tenth and eleventh trading days of the month.

Here you can see what Hirsch’s research says are the days of the week when the greatest likelihood that performance will rise in the Dow will occur. Between 2008 and 2014, Mondays have been the weakest, climbing less than 50% of the time – the only trading day to fall more than it rises, in fact.

As a special case study, let’s focus just on the three days before and after a holiday, specifically Labor Day. Historically, how does the market react to this particular day?

The following chart tracks the historical 33-year performance of four major indexes three trading days before and after Labor Day. As you can see, investors tend to be bullish on the Friday preceding the weekend (-1) and bearish starting Tuesday, the first trading day of the week (+1). The NASDAQ does slightly better than the other three both before and after the holiday, leading into the rest of September.

There’s plenty more research on the best days on which to trade – and which to avoid – in The Stock Trader’s Almanac.

Hours and Half-Hours

Canada is the largest natural resource market in the world. The TSX Venture Exchange, with a market capitalization of over $37 billion, represents approximately 2,250 small-cap companies, many of them in the mining and metals space.

What you see above is the intraday market performance of the TSX Venture. I chose to use it as an illustration because mining, metals and gas are some of our specialties here at US Global Investors. Therefore, it’s imperative that our portfolio management team is cognizant of these exchange-specific intraday trends to buy and sell stock at the best possible price and execution.

With the TSX Venture, it’s generally smarter to sell rather than buy in the morning. Over the last two and a half years, this is when prices tend to be high. There’s heavy volatility as the market is reacting to what might have happened since the previous trading day’s closing bell. Unless you really know what you’re doing in this particular market, if you buy in the morning, you can often expect to see your shares sink as the day unfolds.

The “safest” time to buy would be in the late afternoon. The market has cooled somewhat and traders are gauging where things might be headed. The challenge during this time, however, is that volume has dipped and, as a result, bid-ask spreads have widened.

A similar pattern emerges, a little like the shape of a waterslide, if you chart the intraday performance of the Market Vector Junior Gold Miners ETF, which gives investors exposure to small and intermediate gold and silver companies. Prices are highest in the morning, decrease throughout the afternoon and then get a final boost starting around 3:00. Making a trade at 9:30, then, will have a vastly different outcome than making one at 1:30.

Now compare the TSX Venture and Market Vectors Junior Gold Miners ETF, both of which have their own DNAs of volatility, to the NASDAQ 100 ETF – or “the Qs” – which tracks the 100 largest and most active non-financial and international companies listed on the greater NASDAQ. In other words, blue chip stocks.

Over the same timeframe as the previous indexes, the pattern here has almost reversed. Relative lows in the morning. Modest improvement throughout the trading day. You could, in this market, reasonably buy in the morning and sell in the afternoon.

Again, these charts are imperfect and show only probability. Trading activity can fluctuate widely, especially prior to and after earnings and economic announcements. And there will always be the unforeseen event – a workers’ strike, a CEO’s termination or resignation, civil unrest – that shakes up the market.

You don’t have to be as obsessed and intuitive with statistics and patterns as Yale or his son Jeffrey Hirsch, but it pays to “Anticipate Before You Participate”. If there’s one thing I want to leave you with, it’s that research must be conducted on the market you’re planning to trade in before you enter.

“More and more investors are expecting something big to be announced [by the European Central Bank] at the beginning of September.”

“Whichever tool they choose,” agrees Marcus Grubb, investment director at market-development organization the World Gold Council, “whether it’s [lower] interest rates or even quantitative easing…if you look at the latest [gold ETF trust fund] numbers globally in July and August, we’ve had net new creates.

“I think those two things are related.”

Gold bullion held to back shares in the world’s largest gold ETF – the SPDR Gold Trust (NYSEArca:GLD) – slipped for a second day Tuesday, shedding another 1.5 tonnes to reach 795.6 tonnes, a five-year low when first hit in January.

With the European Central Bank set to meet and decide policy next week, rising bond prices today pushed yields on Eurozone bonds from Austria to Ireland and Italy down to new modern-era lows, after a drop was reported in both Italian and German consumer confidence.

Ten-year German Bund yields fell to fresh record lows beneath 1.0% per annum, with Berlin’s debt offering negative yields to new buyers of all maturities up to 3 years.

German import prices fell last month at the fastest pace since March, new data said Wednesday, dropping 1.7% from July 2013.

US data in contrast continue to signal stronger growth, with Tuesday’s Durable Goods report giving the best print on record as consumer confidence hit a 7-year high.

“One has to say though that gold’s resilience is fairly impressive at the moment,” says David Govett at brokers Marex Spectron in London.

So let us return to the economy. That’s where the excitement is. According to leading economists – notably those paid by the US government to forecast the future – interest rates are going to stay low for a long time.

Perhaps we should pause and say an Ave Maria…or whatever you say when you put a market cycle into the grave.

Maybe we should proclaim a day of mourning. Or at least raise a glass or two.

Yes, the feds have pronounced our old friend dead. Dead… dead… stiff dead… cold dead. Immobile. They denied responsibility for the death of the credit cycle, but admit that it was in their custody when it expired.

Ever since there were markets there was credit, too. And like all things available in a market, it was subject to rhythms – usually related to harvests. Its price varied according to the rules of supply and demand.

The credit cycle seemed permanent. But like so many things in this transitory life, it has now been taken from us by the central planners at the Fed, the Bank of England, the ECB, the Bank of Japan, etc.

Exeunt omnes. Hallelujah!

Specifically, the Congressional Budget Office (CBO) tells us Washington’s interest rate expense on its debt for the next 25 years will bear a striking resemblance to what have seen over the last few years.

It projects a financing cost of 4.1%. That’s close to the average of the last 10 years – and substantially lower than the long term average of 6.59% since 1962.

The CBO’s estimate – if we are to believe it – tells us interest rates are locked in a permanently low range, like the brain waves of a patient in a coma.

Gone, they say, is the excitement of the 1970s and early 1980s up-cycle, which led to the yield on the 10-year Treasury note peaking at over 14% in 1982.

This is not an inconsequential outlook. If interest rates were to rise appreciably, the “borrow, borrow, borrow… spend, spend, spend” economy would disappear.

No kidding…

The post-1970s world was enabled by several interlocking trends. But most important was the decline in interest rates. This allowed debt to expand in a remarkable way.

Total US credit market debt went from 170% of GDP in the early 1980s to over 350% in 2007. In nominal terms, total US debt went from about $5 trillion to over $50 trillion in 2007.

This had the following effects:

Borrowing masked the effects of a slowing real economy. Wages were mostly stagnant. But consumers still spent more money.

Spending in excess of real output shifted the economy from one focused on production to one focused on finance and consumption. The financial industry, in particular, saw soaring profits… and used its wealth to control government policy.

Governments, too, increased spending.

Tax receipts grew along with debt-financed consumption and financial engineering. Tax receipts in 1990 were only about $1 trillion. Now, they are $2.5 trillion. In addition, governments took advantage of low interest rates to borrow more.

This twisted and distorted the economy even further; whether the funds come from borrowing or taxing, government transfers wealth from the productive parts of the economy to those that are unproductive… or even anti-productive.

As time went by, it became more and more important to continue expanding debt. Consumers, business – and the government – had come to depend on expanded credit just to stay in the same place.

Debt expansion became not only an indispensable component of the new economy; it also created its own political support.

With so many people now relying on easy access to credit – including Washington – neither the Fed nor Congress could refuse efforts to hold down interest rates.

So, Congress, the CBO, the Fed… Wall Street… and millions of households and zombies everywhere… all now agree that interest rates cannot be allowed to rise. They must be held down at all costs. If the interest rate cycle is not dead yet, it should be, they reason.

Look at this chart of the Fed funds rate. You see, it looks like the ECG of a man who is brain dead. Flat-lined for 69 months.

And so there they are. Huddled around. Economists. Policy-makers. Politicians. They are all watching him carefully. Checking his pulse. Listening to his breathing…

…and holding a plastic bag in their hands, just in case he seems to be waking up.

Gold PriceComments Off on Brazil Minerals Expands Management Team in Brazil

Brazil Minerals Inc. (OTCQB:BMIX) has expanded its management team in Brazil in order to accomodate for the company’s operational growth. The additions bring a wealth of experience including management skills, experience in operations and experience in finance and administration.

And here, 100 years to the day after the approach of World War I killed the Gold Standard stone dead, the world’s monetary system risks breakdown again.

Again you could blame war in a poor corner of Europe. Again, that war could be cast as a big power demanding a small neighbor says “sorry” – then Serbia for the murder of a fat-necked Austrian prince, now Ukraine for ousting its fat-headed Moscow-backed president.

If irony suits, it only tastes richer when you think this week also marks 70 years since the Gold Standard’s replacement was put together as the war that followed the war to end all wars finally slaughtered itself to a close. But that shadow system…of invisible gold and all-too visible paper…didn’t quite die when the Dollar-Exchange system lost its link to bullion. US president Richard Nixon “closed the gold window” at the New York Fed in August 1971, yet the Dollar still rules today. So like world trade needed access to the City of London a century ago, clearing funds through a US bank is vital for world trade today.

Say US clearing becomes unavailable – or untrusted for credit-default or political reasons. Either trade will shut down (see the post-Lehmans’ crisis of 2008), or it will find other systems to use. Comic little pops like bitcoin might suggest that’s where apolitical free trade is headed, onto Silk Road and elsewhere.

Back to 1914, and “It may be,” one merchant banker noted before the July Crisis hit London, “that hides and rabbit skins are being sold from Australia to New York, or coffee from Brazil to Hamburg.” Either way, and whatever was being shipped to wherever, in every such cross-border deal “the buyers and sellers settle up their transaction in London.”

That remains true of wholesale gold and silver today. Lacking any mine production, and with no consumer demand or refinery output to speak of, the UK still hosts the world’s physical bullion market, settled in London’s specialist vaults and ready for “digging out” onto a forklift truck before being shipped to the new owner should they ever want it. From Arizona to Beijing, Perth to Qatar, the world trades market-warranted London Good Delivery bars. Those same standards apply in most local non-London markets as well. Great Britain still rules in gold, an echo of the high classical Gold Standard shot dead a century ago.

What had stopped the world’s financial heart pumping in London? Scalded in late June 1914 by unknown Serb teenager Gavrilo Princip shooting dead the unlikable Archduke Franz Ferdinand, Austria handed its “belligerent ultimatum” to Belgrade on the evening of Thursday 23 July. Vienna’s 10 outrageous demands made rejection look certain. (Serbia agreed to four, only to find Vienna dismiss its reply and start shelling regardless). Financial markets finally panicked the next morning, at last. They had been slow to take fright, as Niall Ferguson notes of the bond market, distracted by more trouble in Ireland and the coming summer vacation. But now London’s bankers…creditors to half the world’s cross-border transactions, according to Jamie Martin in the London Review of Books…awoke to find their debtors unable to pay. Because “it suddenly became difficult for foreign borrowers to remit payments” anywhere, London would not extend fresh credit. So the world couldn’t raise the loans it needed to settle its debts, and the Sterling bill of exchange – “the world’s premier financial instrument” – went entirely offline.

Sterling bills had been crucial. These bits of paper turned the Classical Gold Standard into that “period of unprecedented economic growth, with relatively free trade in goods, labor and capital” which misty-eyed gold bugs might think came thanks, between about 1880 and the rude end of July 1914, to physical metal alone. Promissory and transferable notes, typically with a 3-month maturity as Martin explains in the LRB, Sterling bills were accepted by traders on one side of the world in payment for goods sent to the other, and then sold to a local bank for cash. Merchant bankers in London then accepted and sold the bills on again, with the original debtor perhaps buying and sending another Sterling bill – rather than shipping physical gold – to settle the deal. Around it all went again. Until Austria’s ultimatum to Serbia stopped it.

Yes, the Sterling standard limped on, and yes, so did something like the Classical Gold Standard after the guns of August finally fell silent in 1918. But private gold had underpinned the whole system before. You could convert cash into gold at your bank, giving them every reason to offer good rates of interest instead. A universal equivalent for all major world currencies, it was vital that the gold was mostly privately owned, rather than trapped in government or central-bank hands (although that was already changing, with fast-growing national hoards announcing the rise of the warfare- and welfare state in the decade before Princip shot the Archduke, much like the political earthquake of WWI had already struck Britain with the People’s Budget five years before). But shipping bullion bars or coin remained clumsy, slow, risky, and thus expensive. So it was paper bills which released the value of the 19th century’s torrent of gold, first Californian, then Australian and finally South African, to grease the first era of globalization.

By the eve of Austria’s ultimatum to Serbia, the bill on London offered to some “a better currency than gold itself,” as a Canadian banker put it, “more economical, more readily transmissible, more efficient.” The City of London, capital of the world, stood ready to buy and sell whatever was wanted.

Nevermind. As Professor Richard Roberts explains in his excellent new Saving the City (free sample here), come 27 July – the Monday after the Serbs got Vienna’s demands – London’s money market was effectively shut. On Tuesday, with major shares like copper-mining giant Rio Tinto dumping 25% in a week, the London Stock Exchange suspended trade for the first time since it opened in 1801. From Wednesday 29 July, commercial banks in Britain stopped paying gold to the long queues of savers pulling out their deposits. But the banking run simply moved to the Bank of England itself, as people lined up on Threadneedle Street to swap the paper £5 notes they’d been given for Sovereign gold coins instead, sucking out £6 million of bullion in three days.

To stall the outflow, the annual Summer Bank Holiday was extended to nearly a week, from Saturday 1 to Friday 7 August. Ahead of the banks reopening, politicians desperate to lock down more gold for the national hoard “vociferously denounced the [private] hoarding of gold in speeches in the House of Commons,” says Professor Roberts. But by then, Great Britain had already declared war on Germany on Tuesday the 4th. The Gold Standard would never recover, built as it was on free trade, Britain’s imperial Navy and those Sterling bills of exchange on London’s credit.

Yes, London’s role as gold clearing house continues today (for now). But total war needed endless state spending. So the free-trade basics – and bullion limits – of the global Gold Standard could no longer apply. Private gold shipments were replaced by government-to-government transfers inside the Bank of England, the Bank for International Settlements, and the New York Fed…before French warships hauled metal to Paris, and Russian Aeroflot jets swapped Kremlin gold for Canadian wheat. London’s Sterling bills have meantime long rotted as the world’s key means of exchange. Which brings us to the US Dollar here in 2014.

French bank BNP Paribas now faces a $9 billion penalty “and a one-year suspension in 2015 of direct US Dollar clearing on its and gas, energy and commodity finance businesses,” explains Pensions & Investments Online, after pleading guilty to $30 billion of transactions “with countries that are under US government sanction.”

That’s some slapdown. “Temporarily restricting its ability to handle transactions in Dollars,” says Bloomberg, “would present BNP with administrative costs and could test the willingness of clients to remain with the bank.”

Financing crooks or clearing their deals is a bad thing, of course. But the list of countries wearing “US goverrnment sanction” only gets longer. Parking or trading your money only gets tougher if your home-state doesn’t suit what Washington thinks. Yes, a London government spokesman when asked Wednesday said there is a link – “a correlation” indeed – between the UK’s new sanctions against Moscow and outflows from London of Russian oligarchs’ cash. “That is certainly the case,” as money scared of being frozen or seized gets out while there’s still time. But London or Frankfurt today is nothing next to the United States’ place in clearing global finance.

“No international bank,” as the Financial Times noted last week, “can operate without access to the US money markets.” And with access now restricted, claims FTfm columnist John Dizard, thanks to “dangerously stupid punitive actions and fines levied on banks using the international Dollar clearing system [means] the world is finding ways to get along without the Dollar.”

Chief amongst them, according to Dizard’s shadowy “sources”, is gold – “the most expensive and least convenient of all monetary alternatives to the Dollar.” Is he kidding? Perhaps not.

“Gold is very heavy to carry and often has to be re-assayed by the person accepting it as payment,” Dizard goes on, “since there is often a lack of trust among participants in the off-the-books transactions that use it.” No London Good Delivery and its chain of integrity here, in short. But where the rules roll over the trade, as India’s surging gold smuggling proves, the trade will find a way if it must.

“Not many transactions or investments are actually invoiced in gold as such,” says Dizard. “Instead gold is used as the settlement medium rather than for the price quotation.”

So welcome to our neo-Classical Gold Standard. “Gold’s popularity as a medium of international exchange,” Dizard says, “has been soaring.” The US might yet adapt, and accept that everyone pays who uses the Dollar, rather than inviting the world to find a replacement instead. Legal drug dealers in the United States, after all, need somewhere to bank their profits too.

Bearish Campbell R.Harvey agrees more than you might expect with this gold bull…

Is GOLD over or undervalued? Are prices headed higher or lower? asks Sumit Roy, managing editor at Hard Assets Investor.

The outlook for gold prices has seldom been as uncertain as it is now, with investors sharply divided in their views on the yellow metal. Two gold market experts, Adrian Day and Campbell Harvey, likewise have significantly different takes on the market.

But while their views on the “fair value” for gold are strikingly different, surprisingly, they arrive at many of the same conclusions.

Adrian Day is chairman and chief executive officer of Adrian Day Asset Management and the author of Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks. Day is a recognized authority in both global and resource investing and a graduate of the London School of Economics.

First though, our gold bear, Campbell R.Harvey – professor of finance at the Fuqua School of Business, Duke University, and a research associate of the National Bureau of Economic Research in Cambridge, Mass. Harvey served as editor of the Journal of Finance from 2006-2012 and has done extensive academic research on the gold market. In 2013, Harvey co-published an extensive paper on gold’s merits as an investment.

HardAssetsInvestor: Would you tell us the methodology you used to come up with your $800 target for gold?

Campbell Harvey: That is one part of the discussion in a larger paper. And the paper looks at many things and many different ways to value gold. The idea is incredibly simple: Gold holds its value over the very, very long run. What that means is that the value of gold is not eaten away by inflation, like a paper currency would lose value.

Another way of saying that is that the real price of gold over the very long term is approximately constant. In our paper, we go to great lengths to try to make that case. I’ll give you two historical examples.

One of them is from multiple thousands of years ago. There, we determined the price of a loaf of bread in gold at the time of Nebuchadnezzar. Interestingly enough, if you take the weight of that gold back then and you applied the price of today, you get about $4 a loaf. Which is not that far from what you would pay for a loaf of bread today.

The second example is maybe even more interesting. It goes back to Roman times, where it turns out that the Romans kept incredibly detailed records of how they paid their soldiers. Given the number of people that a Roman centurion commanded, it is approximately equivalent to a US captain today.

What we did is we looked at the pay of the Roman centurion in terms of gold. They were paid with coins, and those coins still exist today. You can weigh those coins and you can figure the purity of the gold. We compared the centurion’s wage in today’s value of gold to a US captain’s wage today and found that they were in the same ballpark.

Both of those historical examples corroborate the idea that, over the very long term, the real price of gold is approximately constant.

Let me give you another reason why the real price of gold might be approximately constant; it’s kind of like a counterexample. Suppose it was the case that the price of gold goes up through time. Let’s say it goes up very modestly – 1% a year. Given that gold’s been around so long, if you compound that 1% over, let’s say, 2,000 years, you get into a situation that appears to be unreasonable.

For example, a single Dollar in real terms would grow to be $500 million after 2,014 years. That just doesn’t make a lot of sense, so we’re leaning toward this idea that the real price of gold doesn’t change over the long term.

That delivers this idea that if you take the nominal price of gold and you divide by the inflation level or the inflation index, that should be approximately constant. And that’s what we do in our paper. There’s a lot of variation above and below the constant number, but when you’re above, you tend to revert lower; and when you’re below, you tend to increase. That is where this $800 number comes from.

But it’s critical to understand that the model doesn’t say when you get this mean reversion. The examples I quoted you earlier were examples that were from thousands of years ago. Long-term gold will likely decline to its real value, but short- or medium-term gold could appreciate in value.

HAI: You’ve said that gold holds its value over the long term; doesn’t that make it a good inflation hedge?

Harvey: Gold over the very long term does provide that hedge. However, the very long term is longer than most investors’ time horizons. If you look at shorter term, then gold is a very unreliable hedge for inflation. You can see for a period of 10 years – even 20 years – where gold did not provide that hedge.

The problem is that gold is volatile and inflation isn’t; gold is hugely more volatile than inflation. As a result, gold is going to be an unreliable inflation hedge over horizons that most of us would consider our investment horizon.

I do not recommend gold for inflation hedging. However – and this is also important – if you combine gold with a diversified basket of commodities, that’s a different story. That is way more reliable as an inflation hedge.

HAI: Is there anything else you’d like to add?

Harvey: I’ve talked a lot about gold’s value over the very long term, but in my paper, I also discuss factors that could lead to gold appreciating in value in the near term. For example, one thing that’s really striking is that 70% of US reserves are in gold bullion, and 75% of Germany’s reserves are in gold. In China, it’s only 1.6%. They’re sitting on Dollars and Euros and not gold, and that’s an issue for them. If China were to even modestly increase its holdings of gold, that could have an explosive effect on the price of gold.

Another thing we discuss in my paper is that the actual production of gold hasn’t really changed that much over the last 10 years. Even though the price of gold has gone up dramatically, the actual mining production has remained approximately constant. If someone came on to the market wanting to increase their reserves, it would be potentially something that could drive the price much higher.

HardAssetsInvestor: Adrian Day, do you think investors should own gold right now?

Adrian Day: Absolutely. There are two main reasons to hold gold. One is as a very long-term portfolio insurance – a hedge on other assets and markets, and a hedge on instability. We know that sometimes gold and the stock market and other asset classes go up together. But all things being equal, over time, gold will act as a hedge on other financial assets, and particularly, one’s own currency. Thus, I think gold should be a permanent part of one’s portfolio, just like insurance is.

The second reason for owning gold relates to this latest 10-year time frame, where we’ve had extraordinarily easy monetary policy. Interest rates around the world in most major countries are negative. We’re seeing that interest rates at the shorter end are lower than the rate of inflation, so anyone depositing money in the bank is losing money on a purchasing power basis.

We’ve had just extraordinarily easy money around the world, not just in the US In that environment, gold is an asset that will protect you against any consequences of these monetary policies.

HAI: What do you say to the argument that gold is too volatile to be an inflation hedge?

Day: Most people are more worried about volatility than they are about risk. And even modern portfolio theory defines risk as volatility, but they are actually two complete different concepts.

You can put the money in the bank and earn half a% if you’re lucky, lose 2% to inflation, and be in an extremely low-volatility investment. And yet you are guaranteed to lose purchasing power.

As Warren Buffett said, “I’ll take lumpy 20% over a flat 10% any time.” And I’ll certainly take a volatile asset like gold that acts contrary to other financial assets than an asset that is guaranteed to lose me money.

HAI: How do you come up with the value for gold?

Day: It’s a very tricky thing to come up with a value on gold, because most of the traditional metrics that we use for valuing assets depend on future cash flow, future dividend streams, and so on. Gold, of course, famously doesn’t have any cash flow or dividends. And so it’s difficult to value gold on traditional metrics.

But there are all sorts of things one can look at. One can look at gold relative to the monetary base of the United States, or gold relative to the monetary base of the world. All of these things one can look at and they are valid ways of analyzing the gold market. But so much depends on your starting date.

Bears will say, “Well, from 1980 to 2014, gold has not even doubled.” And bulls will say, “Well, if you go from 1970 to 2014, look how tremendous gold has been.” So an awful lot depends on your starting point.

Ultimately, I think looking at gold relative to the value of money is the way to go. And unless you pick a particularly unfavorable starting point, gold today is definitely below where it would be on a historic basis. And that could be anywhere from $2500 to $5,000. I’m not saying it’s going to go there any time soon necessarily. I’m saying that would be the range of values for gold based on the analysis of gold versus money.

HAI: When gold gets closer to fair value, do you think it will stop going up?

Day: I’m not going to say that gold is going to continue to appreciate forever. Nothing does. Over the very long term – 50 years, 100 years, 1,000 years – gold holds its value. Theoretically, gold is intended to hold its value; it’s not meant to generate tremendous returns.

Given that most currencies lose most of their value, that’s a good thing. Look back over the last 1,000 years and there aren’t any currencies other than the British pound that have survived. You go back 500 years, and the same thing holds.

Even looking at the United States over 200 years, the country had several different currencies. France and Germany, likewise, has had several currencies. Every major country around the world sees their currencies come and go. I think gold will continue to hold its value over the long term as most currencies lose their value.